Bond Rates Won't Be Rising Soon

by: David Landes

It is hard to like bonds (any type) at these levels, but these snippets from recent actions don't argue for higher rates any time soon.

Gluskin Sheff's David Rosenberg in his "Breakfast with Dave" comment yesterday. said the odds for a U.S. recession in 2012 are 99%. "Just to be clear, this is not some soft patch. As Bernanke himself alluded to, the whole recovery has been one giant soft patch - tied for the weakest ever despite radical and unprecedented government stimulus. Recession risks are as acute as they were a year ago, but with far less certainty that the Fed and Congress have another rabbit to pull out of the hat." David Rosenberg is a well-known bear, who remains focused on the power of deflationary forces in the economy.

European Union finance ministers meeting yesterday in Brussels were unable to reach an agreement on extending a second bailout package to Greece. Many countries, led by Germany, want bondholders to share in a restructuring plan. This is firmly opposed by the ECB. The ratings agencies have stated any restructuring would be viewed and treated as a default.

Strikes and violence are gripping Greece. The nation's problems extend beyond the sovereign debt woes. Gluskin Sheff's David Rosenberg penned yesterday: "As today's WSJ aptly puts it, even if Greece gets its second bailout and avoids default, its problems are far from over. The country's banking system is in tatters. The average Tier 1 capital ratio for the five major lenders is about 9%. That may not be adequate to absorb a future reduction in value, or haircut, to Greek government bonds. The banks may have enough liquidity for now, but there's little capacity to boost lending, interest rates are in the stratosphere and any further deposit flight risks could trigger a credit crunch. The entire situation is untenable just as the euro is at today's levels."

This does not even address the contagion effects to other members of Club MED/PIIGS.

Moody's placed France's top three banks, BNP Paribas, Societe Generale and Credit Agricole (CASA), on review for a possible downgrade, citing the banks' exposure to Greece's debt crisis. Moody said in a statement, “Today's actions reflects Moody's concerns about these banks' exposures to the Greek economy, either through direct holdings of government bonds or credit extended to the Greek private sector directly or through subsidiaries operating in Greece, a key factor for CASA and SocGen due to their local Greek banks."

Standard & Poor's published a report outlining scenarios for the banking system if Greece should restructure its debt.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.